“The SS-4 Income Stream: How it Could Make You America’s Next Millionaire”

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Mark Skousen has been pitching the “SS-4 Income Stream” hard for the last couple weeks, and I’ve gotten a lot of questions and we’ve had a lto of discussion on the site about it … so I thought we should dig in and see if we can get a definitive answer about which investment he’s teasing.

And yes, of course, we can. May or may not be a fantastic investment, of course, but the mighty Thinkolator rarely disappoints when it comes to identifying the picks teased by these over-hyped ads.

The basic idea is that there’s a way, by buying a publicly traded stock, that you can get the same kind of massive returns that have created mega-fortunes for Mitt Romney and many others, including, as teased in the ad, the people who bankrolled Pillow Pets and Tom’s of Maine and Honest Tea, among others. Here’s how the tease gets us interested:

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“What most people don’t realize is that there is a little-known investment (that’s publicly traded) that lets you band together with very wealthy people who do exactly this.

“They target the best start-up businesses and then ride the profits to immense fortunes. (I’ll tell you exactly which businesses they are targeting in a moment.)

“And the best part is, if you can get in to one of these groups, all the work is already done for you.

“They do all the investigation… Make sure the business is profitable and well-managed… Create plans for quick expansion into new markets… Help get the business into the mainstream.

“And then when the business hits it big or goes public, these people all collect the ‘real payday’ that regular investors don’t get a chance at.

“I can show you exactly how to join one of these groups. It’s as simple and cheap as buying any traditional stock. And I believe it could be the first step in helping you become America’s next millionaire.”

So … sounds appealing, right? Even if we recognize right up front that venture capital investing is not for the faint of heart — after all, for every big successful consumer product that you’ve heard of, like those absurd Pillow Pets that are resting under the heads of the little Gumshoes some nights, there are hundreds more that are abject failures, run through their venture funding, and never make a dime.

Skousen then goes on to make clear, though, that we’re not talking about a real startup fund — this isn’t like the folks who sniff around College campuses to find the next Mark Zuckerberg, as evidenced by the fact that this fund/company that Skousen is teasing pays dividends:

“One reason so many wealthy people are attracted to this opportunity is because the payouts are huge. (And growing quickly)

“For example, since this particular investment group made its first pay out 5-years ago, it has already increased the amount paid annually to investors by a whopping 418%.

“That’s an increase of 84% per year.

“It should come as no surprise that wealthy people are continuing to pour into this investment.

“But here’s what’s most telling…

“The people who run this investing group… the ones who are making all the decisions about which small businesses to invest in… are also buying tons of shares themselves.

“For example, on just one day, September 14 2012, no fewer than 11 insiders put money back into this investment. CEO Vincent F. for example, put approximately $100,000 of his own money in. President Todd R… Director Michael A… Officer Rodger S… Just about everyone was in on the act.

“And all of these guys have been pouring more and more of their own money into the investment each month.”

Ah, that sounds pretty intriguing — lots of insider buying from different folks who should know what the prospects look like, plus a growing payout? That narrows it down quite a bit.

And then we get just a few more clues:

“In my report The SS-4 Income Stream: How it Could Make You America’s Next Millionaire, I’ll give you the complete details on how you can become a member of this group of wealthy investors.

“It’s as easy as buying any simple stock. It’s publicly traded. They consistently make big profits, which have grown by 326% over the last three years. And there is NO WEALTH REQUIREMENT necessary. If you want to start with $200, you can. Or if you want to go big with $200,000, you can do that too.

“The only difference will come on payday.

“It’s important to note that if you do start with just $200, it’s significantly less likely you’ll make $1 million in the short term. Of course, as a seasoned investor, I’m sure you realize that.”

So yes, there’s the rub — if you want to get the million-dollar checks like those teased by Skousen, and you want to do it through a fund like this instead of by investing your own nest egg directly with the guy who says he has invented the next Pillow Pet or Beanie Baby or whatever, well, you’ll have to put up a lot of cash. Doesn’t mean that it can’t be a profitable investment, of course, but these kinds of companies are fairly mainstream investments and if you want to get a million dollar check from them in any given quarter, you’ll have to have invested about $75 million in buying shares.

If you want the far more boring description of the company, here’s what they say they do:

“Main Street is a principal investment firm that provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies. Main Street’s portfolio investments are typically made to support management buyouts, recapitalizations, growth financings, refinancings and acquisitions of companies that operate in diverse industry sectors. Main Street seeks to partner with entrepreneurs, business owners and management teams and generally provides “one-stop” financing alternatives within its lower middle market portfolio. Main Street’s lower middle market companies generally have annual revenues between $10 million and $150 million. Main Street’s middle market debt investments are made in businesses that are generally larger in size than its lower middle market portfolio companies.”

That’s fairly typical of Business Development Companies, though MAIN has been much better than the average BDC over the past year or two (I’m using the exchange traded note that tracks BDCs, ticker BDCS, as the benchmark). They help to fund companies that are too big for the neighborhood bank and too small for Wall Street, and many of them are federal small business lenders as well. BDCs are not usually venture investors, they are bankers who aim for a poorly-served niche … some of them are very active with their portfolio companies, putting people on the board and advising the company and taking a slice of equity in the company, and others are more passive lenders.

They are restricted in the amount of leverage they can use, so BDCs don’t lever up nearly as much as regular banks do … but since these midsize companies tend to be pretty cyclical or economically sensitive they have historically gotten in trouble when the economy takes a hit — BDCs got clobbered in the 2008-2009 financial crisis when some of their customers couldn’t pay them back … though, to be fair, much of the problem BDCs got into during that crisis was that they used short term debt to lever up, and they couldn’t renew those loans when banks were shutting off all lending. Some of that has been fixed by extending the terms of borrowings by many of these firms, including MAIN, though that could also cut into their returns somewhat (borrowing money for five years at a fixed rate brings a higher interest rate than borrowing for one year and rolling it over every year).

It looks like MAIN has about 50 companies in its portfolio now, so they’re probably not terribly concentrated, and while the company is fairly new as a public company they have been around for about 15 years as an investment fund and have helped some of their previous investments go public, presumably with strong returns. Analysts are just as pleased with MAIN as investment newsletters have been lately, foreseeing continued steady earnings growth and dividend growth, and the insiders have been steady buyers as well, so there’s plenty of optimism moving the stock up — that doesn’t mean it can’t go down, of course, but they’ve continued to be active and the news has all been good as far as I can tell in the few minutes I spent reading their announcements today.

MAIN pays a monthly dividend, which helps to keep investors happy given the fairly recent love affair with these more regular payouts, and they also raise the dividend at least a couple times a year in most years … and pay out a special dividend at the end of the year to boot (that’s probably a tax requirement for a good year — to keep BDC status they have to pay out the lion’s share of earned income as dividends). So with the 15 cent monthly dividend and the recent special dividend of 35 cents, the indicated annual dividend would be $2.15 for a yield of 6.7%. Not bad at all.

There are plenty of other options in BDC land, my favorite listing is from the Dividend Detective here and there’s also usually good coverage from the BDC Reporter here. If you want a more diversified exposure to these investments, there’s also the relatively new ETNs for BDCS from UBS, the UBS E-TRACS Wells Fargo Business Development Company ETN (BDCS) and the 2X levered version of that (BDCL). MAIN has a roughly average dividend yield for the sector, despite having generated much better stock returns than most BDCs over the past year, so it’s hard to argue with their performance — but you can get roughly the same yield from BDCS or, if you want to take the risk of extra leverage, a yield of more than 12% from BDCL. Do note that those are exchange traded notes, not ETFs, so they are actually debt securities from UBS and are backed by UBS — they don’t actually own the underlying stocks, they just promise that these notes will mimic the return of the stocks.

So there you have it — perhaps a millionaire-maker sector, though it would help if you started with really close to a million dollars, or if you’ve got a few decades to let the income build up. BDCs get teased quite a bit for their similarity to sexy venture capital investments, but what you’re really doing, for the most part, is helping make sure that managers of mid-sized businesses can buy out their boss when he retires, or get funding to expand or take over competitors. No reason to sneeze at the very nice yields that these stocks offer, though all the attention on this space and the expanded number of competitors may well mean that there’s going to be more competition for this kind of business in the years to come. I don’t currently own any BDC stocks, but it’s been a solid income-producing sector and MAIN has certainly been a really, really good one over the past couple years.

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The present stock price of MAIN is 80% above book value according to Yahoo Finance. There are few BDCs selling at such a large premium. The higher the valuation above book value the greater the risk of losing money. IMO the time to buy into MAIN has come and gone, and it is now too costly and too risky to buy.

Dan Ferris, a Stansberry analyst, claimed this week that all BDCs are high risk and show large variations in price. Still, if a BDC covers its dividend with a payout ratio under about 80% of free cash flow and if it is selling for meaningfully less than book value, it can be worth buying and holding until it rises above book value.

Interesting, I don’t follow BDCs all that closely since I haven’t owned them in a while but yes, MAIN is trading at a larger premium to book than most — I don’t know if there’s a business or accounting reason for that, or if they’ve just been more successful at turning their assets into income than the average BDC. People buy these almost exclusively for income with an eye on the dividend yield, and BDCs are almost exclusively owned by “main street” investors who want steady and rising dividends and care less about the reported book value (institutional holdings are almost all very low in these stocks). Maybe folks have bid this one up too much because they’re enamored with the monthly dividend, it has certainly been on quite a run … I suspect that we probably won’t know that there’s a real problem with overvaluation that hits the stock price unless and until something happens to the dividend.

I believe the year end special divs are typically return of capital on investment gains, so don’t you can assume they are recurring. The regular dividend yield of 5.6% appears to be nominally covered by recurring income – not that exciting though unless you think it will grow. I’d buy MIC or ORI (both 6% yielders) before I bought this particular name, but in fairness haven’t spent much time on it.

I agree it’s probably a bit high right now. The Oxford Club recommended it in Dec. 2011 and I should have bought in then but didn’t. Back then it was around $20.50, which was a good price to get in at. So, who’s a smart boy then – subscribing to an investment letter and not acting on their recommendations (I didn’t have any funds at the time)!

Oxford recommended it again in August 2012 at about $25 saying there had been lots of insider buying. I missed their initial reco, and should have nibbled then at $25 but I tend to watch stock before buying and so did not get in until October at about $29 – likely too high for comfort. Still now at $31.98 I can’t complain and the dividend will help as I intend to hold for some time to come.

Recently Keith Schaefer has been teasing a Company, I think that is “Anatolia Energy Corporation” It is an oil and gas company engaged in the exploration and development of oil and gas in Turkey. It’s ticker is AEE-TSX-V. It trades in Toronto Stock Exchange , Venture.

Skousen (along with many teasers) doesn’t understand the mathematics of compounding.
He claims that a 418% growth over 5 years is the result of 418/5 = 84% per year growth.
Actually a compounding rate of 33% per annum yields 418% over 5 years. The calculation is (1.33) to the fifth power = 4.18 (approximately).
If I compound at 84% per year the result is (1.84) to the fifth power = 21.09 or 2109%.
There is no excuse for this level of incompetence.

ss4 is an IRS form to get a Federal ID Number(FIN). Like when you’re forming a business, openining an account for an Estate. It’s like your Social Security Number. Google IRS Forms, and scroll to it. It just asks for name, address, type of entity, etc. No Big Deal. It does nothing except give you a number. Like if your child wants to open a lemonade stand business, he/she would apply for the FIN this way–and that identifies the business just like the numbers on your Drivers License identifies you.

Travis,
I really enjoy your work here at Gumshoe. I cannot tell the future, but have been investing in BDC’s since 2009 and they have performed well for me during that period:
CODI, purchased in 2009, up 140%
HRZN, purchased in 2010, up 27%
BDCL, purchased in 2011, up 36%
I have reinvested dividends in all of the above. My yield on cost is over 13% for the three positions. CODI is a bit of a hybrid. It is a BDC but is structured as a MLP (Master Limited Partnership), so you do get a K-1 on that investment each year.
Good luck investing and as always, caveat emptor.

Publisher: Eagle Financial Publications

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